The Impact of Financial Institution Quality and Financial Stability on Trade-Adjusted Carbon Emissions: The Moderating Role of Green Innovation and Environmental Taxes

Abstract

This study analyzes the impact of financial institution quality (FIQ) and financial stability (FSI) on trade-adjusted carbon emissions (TAE) in G7 countries from 2000 to 2022. It also examines whether green innovation (GI) and environmental taxes (ET) moderate this relationship. In the study, long-term coefficient estimations were conducted using the Seemingly Unrelated Regressions (SUR), Panel-Corrected Standard Errors (PCSE), and Driscoll-Kraay standard error estimator methods. The results show that GI, ET, FIQ and FSI variables have a negative and significant effect on TAE. Green innovation and environmental taxes reduce carbon emissions, while strong financial institutions and stable financial systems enhance environmental performance by supporting sustainable investments. The Dumitrescu-Hurlin (D-H) causality test results indicate a unidirectional causal relationship between these variables to carbon emissions. These results highlight the significance of integrating environmental policies with financial systems and promoting GI for sustainable development.